The imaginary American debt crisis is here to stay

Now that we have surpassed 2008 highs in household debt, I guess we are due for a panic attack. Four times a year, the Federal Reserve Bank of New York’s Center for Microeconomic Data releases its “Quarterly Report on Household Debt and Credit.”

Soon after, we get the freak out over the record amount of debt. It often unnerves investors and policymakers, who then do silly things against their own interests.

That’s where we come in.

A single number seen in isolation might score some clicks, but it doesn’t help the average person understand the data.

Once upon a time, a 100-point decline was a lot when the Standard & Poor’s 500 Index was less than 1,000; but it’s barely a blip when the Dow Jones Industrial Average is higher than 22,000. If Wal-Mart Stores Inc. fires 1,000 people, it creates a personal disaster for the individuals, but it isn’t meaningful to a company that employs 2.3 million people.

Yet the understanding that all numbers need to be qualified continues to elude many people.

You can go through most of the first three-dozen links in a Google News search of the term “household debt,” and article after article will omit the crucial question of Americans’ ability to service that debt—or make payments that cover current interest and principal. The ability to service that debt is central to understanding how and when borrowing becomes risky.

The chart showing record debt by itself is what comedian George Carlin used to call a “partial score.”  The complete score, of course, would include how you service that debt.

The total amount of revolving credit outstanding, much of it reflecting credit-card borrowing, peaked in 2008 and then collapsed during the financial crisis. After bottoming in 2011, it slowly began to rise, and almost 9 years after the peak has finally reached new highs. There also were new records for the size of the US population, gross domestic product, total household income, net worth and, perhaps most important of all, disposable personal income. This is what tends to happen in an economic expansion. The ability of the average Americans to service their debt is nothing like it was a decade ago.

But as long as too many pundits and commentators are unwilling or unable to master the basics of economic context and simple math, we’re doomed to these predictable episodes of hand-wringing.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners. 

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